Amid the shareholder furor and government investigations over the practice of backdating stock options, many may have misunderstood the economic value of a backdated stock option. It’s not worth as much as one would think, some consultants contend.

When an option is backdated, the grant date is set earlier than the actual date it is granted, usually to benefit from a lower stock price. “Backdating is a sneaky way of turning an at-the-money option into an in-the-money option,” said Paula Todd, a principal at Towers Perrin. Yet most of a stock option’s value comes from its value over time, not its “intrinsic value” at the time it’s granted, according to Towers Perrin.

Generally, people assume that there is a linear relationship between an option’s strike price and its value, observes Todd. However, “an option 10 percent in-the-money is not worth 10 percent more than an at-the-money option,” she explained.

Consider that a $10-in-the-money backdated option has an exercise price of $90. Without backdating, let’s say, it would have been set at $100. Under the Black-Scholes option-pricing model, assuming a risk-free rate of a 5 percent return, the backdated option has a theoretical value only $1.80 higher than the non-backdated option. The backdated option with a 119-month term would be worth $68.88, while the regular option with a 120-month term would be worth $67.08.

In the Black-Scholes model, there are six factors that affect the option’s value: the option’s term, the risk-free rate of return, the exercise price, the dividend yield, the stock’s fair-market value, and the stock’s volatility. “The strike price is one input into the Black-Scholes model, but it’s not the only one that matters by a long shot,” explained Todd.

Todd emphasized that her firm isn’t suggesting that backdating isn’t an unfortunate practice. Rather, the consultant’s research shows that even option-granting companies have missed the point. In sum, backdating doesn’t create much difference in an option’s value. “How much of a difference it makes depends on the inner workings of the other inputs of the model,” says Todd.